Does Audit Committee Reporting Need to Be Improved? Evidence from a Large-Scale Textual Analysis

Abstract

The Securities and Exchange Commission (SEC) issued a Concept Release in 2015 which considers expanding audit committee reporting requirements to include greater disclosure of the audit committee’s oversight of the external auditor. To provide insight into whether additional reporting requirements are needed, we (1) perform a large-scale textual analysis of the content of over 7,000 U.S. companies’ audit committee report disclosures issued between 2006 and 2016 and (2) explore whether investors find such reports informative. We find that audit committees voluntarily increased disclosure of their financial reporting and auditor oversight activities following the SEC’s 2015 Concept Release. However, the economic significance of our findings is small, and the disclosure levels still fall short of post-Sarbanes-Oxley disclosure levels. In addition, we find that these additional voluntary disclosures are informative to investors. In particular, audit committee reports with greater disclosure are associated with lower misstatement risk and greater shareholder satisfaction of the audit committee when an internal control material weakness is announced, as measured by shareholder votes to ratify the audit committee members. Overall, our findings indicate that voluntary increases in audit committee disclosures have occurred, but there is still room for improvement.

Keywords: audit committee reports, voluntary disclosure, textual analysis, LIWC

JEL Classification: M41, M48